TSU Financial Results at Graphic Apparel Corporation Case Study Discussion

ISSUES IN ACCOUNTING EDUCATIONVol. 30, No. 1
2015
pp. 1–12
American Accounting Association
DOI: 10.2308/iace-50762
Evaluating Financial Results at Graphic
Apparel Corporation (GAC):
The Impact of Accounting Policies
Fred Phillips
ABSTRACT: This case requires students to evaluate financial reporting practices
adopted by a small apparel company. The company’s owner/manager has recently taken
the business in a new direction, and is asking for help in determining whether the
company’s existing financial accounting policies continue to be appropriate and how
alternative policies would affect the reported financial results. This case will require
students to apply knowledge of financial accounting and financial statement ratios to
judge the appropriateness of selected accounting policies. This case is designed for use
in introductory and intermediate financial accounting courses that aim to develop
students’ critical thinking skills.
Keywords: merchandise inventory; asset valuation; revenue recognition; current ratio;
debt covenants.
INTRODUCTION
T
here is nothing like being a small business owner, thought Nicki Singer as she reflected on
her first year of running the Graphic Apparel Corporation (GAC). Sure, you have to make
sacrifices, such as putting in long hours and initially getting little in financial return, but she
says the feeling of being your own boss in the apparel fashion business is worth those sacrifices.
Creativity and independence are important to Nicki, who considers herself a free spirit willing to go
against the grain and consider new perspectives when making decisions. No doubt, fresh thinking is
what first attracted Nicki to clothing and fashion, and now—in October 2014—it has led her to ask
you for financial accounting advice.
Fred Phillips is a Professor at the University of Saskatchewan.
I thank Allen Blay (associate editor), Karen Cravens, Lori Holder-Webb (editor), Doug Kalesnikoff, Brandy Mackintosh,
James Smith, two anonymous reviewers, and members of the CAAA Education Committee for comments on a prior
version of the case.
An earlier version of this case received first prize in the Canadian Academic Accounting Association’s (CAAA) 2013
Case Writing Competition.
Published Online: March 2014
1
2
Phillips
Background
For as long as Nicki can remember, she has had a keen interest in fashion. While in high
school, she created a fashion blog that rated among the top 100 style sites and garnered her
invitations to fashion shows and designer sneak peeks. After high school, she enrolled in an
undergraduate program in fashion merchandising so that she could continue to pursue her dream of
creating her own fashion apparel brand. To finance her education, she worked part-time at GAC—a
local T-shirt screen printing company that made graphic T-shirts for retail stores and, to a lesser
extent, custom order shirts for sports teams and local organizations. Through this part-time job,
Nicki gained experience in clothing design, production, and sales. This hands-on experience
confirmed her interest in a fashion apparel career, and she looked forward to completing her
merchandising degree so that she could start making her own mark in the ‘‘real world.’’
The opportunity to enter the business world came sooner than Nicki had expected. A serious
illness had befallen the owner of GAC, and he was forced to stop working at the company. He had
no family, and Nicki was the employee who had the most experience at GAC, so he asked Nicki if
she would consider taking over the company. At first, she declined. She was only one year from
completing her degree and it seemed a shame to quit without finishing. But the more she thought
about running the company, the more excited she became. She had abundant energy and many
ideas for bold new designs to attract new retail customers, which could possibly make a name for
Nicki with end consumers. Also, Nicki had developed a strong relationship with GAC’s owner and
she wanted to see his business survive as his health failed. Likewise, he wanted to give Nicki a head
start in the apparel business, so he offered GAC to Nicki at a favorable price. He advised Nicki that
because GAC had virtually no debt on its balance sheet at the time, she could finance the purchase
of his shares as a leveraged management buyout; the bulk of the money to purchase the owner’s
shares would come from a loan secured by the company’s assets. After much contemplation, Nicki
decided to go for it. She took over ownership of GAC in January 2014.
GAC’s Business Activities
GAC’s business model, which had changed little over the past few years, is a simple one. In the
winter, the company purchases batches of plain white and black T-shirts from suppliers. These
shirts are received and stored in a local warehouse. Each spring, GAC produces ‘‘graphic’’ shirts
using a screen-printing process whereby plastisol and water-based inks are applied to the plain
shirts to achieve desired design outcomes. These graphic shirts are sold to retail clothing stores in
early summer. At the end of summer, after T-shirt sales taper off, GAC generously offers a full
refund to retailers for any unsold graphic shirts, provided the shirts are returned by October 15 of
that year. GAC then sells these shirts to discount stores for about one-half of GAC’s original cost.
In prior years, retailers had sold almost all the graphic shirts, so GAC’s generous return policy had
little effect on GAC’s financial position. At various times throughout the year, GAC also will use its
plain white and black shirts to produce ‘‘custom’’ shirts on order from local sports teams,
businesses, and community organizations. Unlike sales to retail companies, GAC requires that these
customers pay in advance and GAC does not allow returns on these custom sales.
Despite relying on a relatively stable business model, some changes have occurred since Nicki
took over GAC. One of the most obvious changes that Nicki implemented was to alter the look of
GAC’s 2014 graphic shirts. Her blogging experience had taught her that fashions change quickly in
the apparel industry. Being eager to establish a reputation for fresh new looks, Nicki created designs
for GAC’s 2014 graphic shirts that were edgier than in previous years. To her delight, Nicki caught
the attention of bloggers and fashion critics, who described her designs as ‘‘bold’’ and ‘‘inspiring.’’
However, GAC’s base of conservative retailers were not quite as enthused. They anticipated that
consumers in their target markets would be turned off by the new looks, so they cut back their
Issues in Accounting Education
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Evaluating Financial Results at GAC: The Impact of Accounting Policies
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orders for the 2014 season. Nicki was disappointed by this turn of events, but, undeterred, she
sought new customers. After many store visits and aggressive marketing efforts, Nicki was able to
replace several of GAC’s reliable, longstanding customers with new start-up clothing stores that
were excited to offer bold and inspiring graphic designs to their end consumers. Although Nicki is
looking forward to working with these new retailers, she is concerned that they do not seem as well
managed as the GAC customers they replaced. These new customers complain that it is difficult for
them to comply with GAC’s sales terms of n/30. Acknowledging that she may be fighting a losing
battle, Nicki is becoming resigned to the idea of not collecting $3,000 of the August 2014 Accounts
Receivable. However, she is adamant that she will not change the stated collection period, nor will
she offer discounts for prompt payment; GAC’s terms are standard in the industry.
Throughout the spring and summer, Nicki worked tirelessly to secure more custom orders from
local sports teams and community organizations. As a sports and recreation enthusiast, Nicki had many
connections in the local community with whom she met. Her visits with these groups were initially
unsuccessful in producing orders for the current year but, by the end of summer, she had generated a
significant number of orders to be filled during the fall months. Nicki calculated that as of August 31,
2014, she had secured $10,000 of sales orders, of which $7,500 had been collected in cash. Because
$2,500 of the sales orders came from her own sports teams, Nicki made an exception to GAC’s policy
of requiring payment in advance and instead recorded them as accounts receivable. Because she plays
on these teams herself, she does not anticipate having problems collecting the balances after the shirts
are delivered. In late August, GAC started production of the $10,000 in custom shirt orders. Nicki was
encouraged by this situation because, in prior years, this was a slow period for the company. Indeed, as
of August 31, 2013, GAC had only $100 of custom orders to fill in the fall.
In addition to the challenge of maintaining sales levels, Nicki encountered other issues during
the year. For example, in May 2014, Nicki discovered that GAC’s warehouse roof was leaking.
Although the roof was easily repaired at little cost with no damage to the building itself, the leak
caused stains and other water damage in about half of the plain shirts that had been purchased for
the 2014 season. Nicki was able to remove the majority of the stains by laundering the shirts, but
some stains remained and were apparent when viewed under certain lighting. Always looking for
the positive side of problems, Nicki felt that these subtle stains presented a hidden ‘‘grittiness’’ that
complemented her edgier designs, so she used the slightly imperfect shirts when producing the
2014 graphic design shirts. To date, the retail stores have returned only a few shirts and have not yet
reported any continuing issues with the imperfections. But it may be too soon to tell whether end
consumers will be so forgiving. Nicki noted that dozens of GAC shirts had been on racks in the
clearance section of a local department store in early August, but were no longer on display when
she returned in September. She hopes that retailers were successful in selling this merchandise, but
she is troubled that she saw employees removing shirts from the clearance section at one store in
late September to make room for new fall clothing that had arrived. Based on follow-up queries
with GAC’s retail customers, Nicki estimates that GAC’s total selling price for all shirts held by
retail stores at the end of August was $15,000.
A final change that occurred this year, and possibly the most significant, relates to GAC’s bank
financing. In prior years, GAC had no long-term debt, so its only external financial statement user
was the Internal Revenue Service (IRS). Because GAC’s accounting matters were straightforward,
the previous owner handled most of the accounting himself and hired a part-time accountant only to
prepare financial statements for tax purposes at the company’s August 31 year-end. After Nicki
took over, the company shifted from equity financing to debt financing. With that change, the bank
now requires GAC to submit its annual financial statements, prepared in accordance with generally
accepted accounting principles (GAAP), to the bank within 60 days of its year-end. GAC’s loan
agreement includes a covenant that requires a minimum current ratio of 1.0. At the present time, the
lender does not require an external audit of the financial statements, but that could be requested in
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EXHIBIT 1
Excerpts from GAC’s Comparative Financial Statements
Panel A: GAC’s Comparative Income Statement
(continued on next page)
the future if GAC violates its covenant. For now, Nicki has GAC’s part-time accountant prepare
financial statements each month and for the year ended August 31, 2014.
Your Involvement
GAC’s present accounting policies were developed years ago by the part-time accountant, in
consultation with the former owner. Nicki admits that although she recently completed an
introductory financial accounting course as part of her degree in fashion merchandising, she does
not recall many of the details of accounting. But she does remember that accounting policies and
judgments can exert a significant impact on the reported financial results. Consequently, Nicki has
asked you to look at GAC’s 2014 annual financial statements to determine whether they are likely
to be acceptable to the lender. If any aspects of the financial statements need to be changed, Nicki
would like you to explain—in language she can understand—the changes, reasons for changes, and
likely impact on GAC’s relationship with its bank. Excerpts from the most recent draft of GAC’s
year-end financial statements are presented in Exhibit 1.
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Evaluating Financial Results at GAC: The Impact of Accounting Policies
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EXHIBIT 1 (continued)
Panel B: GAC’s Comparative Balance Sheet
(continued on next page)
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EXHIBIT 1 (continued)
Panel C: GAC’s Financial Statement Notes
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Evaluating Financial Results at GAC: The Impact of Accounting Policies
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CASE LEARNING OBJECTIVES AND IMPLEMENTATION GUIDANCE
Case Learning Objectives, Applicable Courses, and Related Cases
The case was written to achieve the following learning objectives:
(a) apply financial accounting knowledge in a realistic setting,
(b) identify where judgment exists in financial accounting,
(c) demonstrate that accounting policy choices affect reported financial results,
(d) apply financial ratio analysis in interpreting economic events, and
(e) (optional) express thoughts in writing in a professional manner.
To achieve these objectives, the case challenges students to identify and evaluate accounting
policy choices that affect the decision of a key external financial statement user. The case mixes
easy tasks (e.g., computing ratios, identifying accounting choices) with challenging tasks (e.g.,
using ratios to evaluate accounting choices, evaluating accounting choices with other qualitative
and quantitative evidence, calculating estimated adjustments and financial statement effects).
Learning objective (e) is labeled optional because the case can be used as either a discussion case or
writing assignment. An important feature of the case context is that the main character—Nicki
Singer—possesses academic experience similar to the students who would be assigned the case.
Consequently, these students can readily gauge the extent to which they should explain underlying
financial accounting concepts and policies.
The case topics include revenue recognition, asset valuation, and financial statement analysis,
making it suitable for use approximately two-thirds into an introductory financial accounting
course, especially when ratios are integrated topic by topic. The case also can be used for
intermediate financial accounting, especially in curricula that present intermediate financial in two
courses, with the first course focusing on assets and related income statement accounts, as this case
does.
This case complements several other integrative cases written for use in introductory financial
accounting. The motivating reasons for adding to this body of work are threefold. First, the ease
with which students can share information between semesters makes it difficult for instructors to
reuse cases across successive semesters. Consequently, instructors often adopt a practice of case
rotation, where a case is used in one semester, but then shelved for a year or two before being used
again. This practice of case rotation is only possible when several similar cases are available for
rotation. Assuming that undergraduate students (and their course projects) remain in the student
body until their graduation approximately five semesters after completing an introductory financial
accounting course, a minimum of six such cases is needed to support rotating cases through
successive semesters of the introductory course.
The second, and perhaps more important, motivating factor relates to topic coverage and stage
at which integrative cases can be used in a course. My experience with the previously published
integrative cases is that they are most effectively used during the last two weeks of the course,
because they include topics typically covered in the final chapters of most textbooks. My goal in
writing the current case was to include relevant topics that have been introduced by the midpoint of
the course, thereby allowing this case to be presented earlier and followed up with more
comprehensive cases at the conclusion of the course. Exposing students to two cases in a single
semester allows students to learn from their first integrative case experience and focus the latter part
of their course efforts on integrating topics across subsequent chapters.
The third, and most important, motivating factor was to encourage students to evaluate the
appropriateness of accounting policies given changes in the business environment. Other published
cases have encouraged students to question accounting policies because management exhibited a
bias to misrepresent financial results. An undesirable implication of this theme in the prior case
Issues in Accounting Education
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resources that students inferred was that management bias and deception were rampant in the
business world. I was motivated to write the present case to downplay this unsavory theme, while
still requiring students to challenge the appropriateness of selected accounting policies.
To assist faculty in selecting among the available integrative cases for introductory financial
accounting, Table 1 lists the six cases that aim to achieve learning objectives similar to those listed
at the beginning of this section. These cases were identified from a prior review of the case literature
conducted by Phillips and Mackintosh (2011) and updated by Johnstone, Mackintosh, and Phillips
(2013). As shown in Table 1, these six cases span more than 15 years and each is set in a different
industry. Three of the cases explicitly direct students to the case issues by asking them to calculate
the financial effects of particular accounting methods (e.g., LIFO versus FIFO), and the other three
cases require students to detect the issues themselves. Among the three ‘‘detective’’ cases, the
previously published works contain a management bias theme, as discussed above. In contrast, the
underlying theme in this case is not management bias but, instead, a change in business model
emphasizing the more palatable theme that selected accounting policies should best represent the
financial effects of business activities.
The final observations to be drawn from Table 1 relate to the preceding discussion of case
rotation and timing. Given that the present case and the other two detective cases comprise a
balance of quantitative and qualitative issues, this case is ideal for instructors seeking a case to
rotate with the Wiki Art Gallery and Second Round Electronics cases. A distinguishing feature of
the present case, however, is that it can be used earlier in the course, as indicated by the last column
of Table 1.
Implementation Guidance and Experiential Feedback
This case can be used in class discussion and/or as a writing assignment. The Teaching Notes
include materials that support the case when used as a discussion case (see the list of discussion
questions and answers in the Teaching Notes). Appendix A of this ‘‘Implementation Guidance’’
section provides additional guidance to adjust the difficulty of the case when using it as a writing
assignment.
Using the Case in Class Discussion
The case author used the case as a basis for class discussion in two sections of the introductory
financial accounting course, attended by approximately 50 students in each section. To facilitate
discussion, students were provided the discussion questions listed in the Teaching Notes. Students
were encouraged to prepare for class by reading the case and making notes for each discussion
question. No extrinsic incentives were given for students to prepare for the case discussion, but
students were advised that the case could serve as a valuable final exam review tool. A 75-minute
class meeting during the final week of class was devoted to discussing the case; this amount of time
was adequate for discussing in detail all the questions listed in the Teaching Notes. Class
observations were recorded and organized in a manner that resembled the ‘‘board plans’’ presented
in the Teaching Notes.1
1
One of the reviewers of this case described a useful approach to motivate students to prepare cases for discussion.
The reviewer allocated a few points to a requirement for students to submit a one-paragraph case summary and a
short response to one or two critical issues in the assigned case. Students earned credit for providing a reasonable
attempt at summarizing and evaluating case issues, but were not graded on the completeness or accuracy of that
initial analysis because the goal was to merely motivate students to read and think about the case prior to its
discussion in class.
Issues in Accounting Education
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Issues in Accounting Education
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Phillips
Graphic Apparel
2014
2011
2013
2011
1998
2000
Year
Apparel
Home improvement
Electronics
Artwork
Recreation
Cosmetic products
Industry
Yes—management
bias to increase
share price
No
Yes—management
bias to comply
with loan
covenants
Yes—effects of
change in
business model
No
No
Hidden Issues?
IC, BD, Dep, L
RR, SR, IV, BD, Dep
RR, UR, SR, IV, BD
Quantitative and
Qualitative
RR, IC, BD, Dep, Int,
Am
Quantitative and
Qualitative
Quantitative
Quantitative and
Qualitative
SR, IC
IC, BD, Dep, LC
Topics*
Quantitative
Quantitative
Emphasis
* SR ¼ sale returns, IC ¼ inventory cost, BD ¼ bad debts, Dep ¼ depreciation, LC ¼ loss contingency, RR ¼ revenue recognition, Int ¼ interest, Am ¼ amortization, L ¼ leases, IV ¼
inventory valuation, UR ¼ unearned revenue.
Claiborne and Wilcox
Johnstone,
Mackintosh, and
Phillips
Persons
Phillips, Morris, and
Zvinakis
Phillips and
Mackintosh
Author(s)
Home Heaters
Second Round
Electronics
Wiki Art Gallery
Best Bike
Baywatch
Case
Comparison of Integrative Cases for Introductory Financial Accounting
TABLE 1
Evaluating Financial Results at GAC: The Impact of Accounting Policies
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Phillips
No formal feedback was collected when the case was used for discussion, but students
spontaneously expressed positive reactions orally to the instructor and in written, anonymous
course evaluation surveys completed after the course ended.
Using the Case as a Writing Assignment
The case was used as a writing assignment in seven sections of an undergraduate introductory
financial accounting course taught by four different instructors, of which one was an author of the
case.2 To encourage students to carefully edit their written reports, submissions were limited to
1,600 words. This limit proved adequate for all but the poorest written reports. The case report was
due during week 11 of the semester-long course, and contributed 15 percent to the final course
grade. Students reported spending an average of 11.3 hours on the case report (inner quartile range
of six to 15 hours).
To gain insight into students’ experiences with the case, surveys were distributed to students in
seven sections of the introductory financial accounting course. The surveys were given after
students had submitted case responses, but before they received feedback on the submissions. Of
385 registered students, 232 (60 percent) voluntarily and anonymously completed the survey. Table
2 presents survey questions and results.
Using a five-point scale, anchored by 1 (strongly disagree) and 5 (strongly agree), students
indicated that, on average, the case was challenging (4.34) and required deeper thinking than other
homework assigned during the course (4.66). Students also agreed that the case had achieved the
learning objectives stated earlier. The average rating for each of the stated learning objectives was
(a) 4.23, (b) 4.23, (c) 4.55, (d) 3.82, and (e) 4.05. As reported in Panel A of Table 2, these average
ratings exceeded the neutral midpoint of the scale at a level considered statistically significant
(p , 0.001).
Despite students’ agreement that all learning objectives were achieved, instructors should note
that the lowest-rated learning objective related to financial ratios, which suggests some students
struggled to achieve this learning objective. This difficulty involving financial ratios may be related
to how financial accounting textbooks present this topic. For example, most introductory financial
accounting textbooks describe how financial measures, such as the days to collect receivables, can
be used to evaluate a company’s financial performance, but they do not coach students how to use
ratios to critically evaluate accounting choices (e.g., signaling a need to allow for doubtful
accounts) or how to ‘‘reverse engineer’’ accounting data to determine underlying accounting
transactions (e.g., using the gross profit percentage to work backward to determine the cost of
inventory from selling prices). For this reason, the use of financial ratios may be one area where
students would benefit from instructors providing explicit guidance when assigning the case.
Appendix A provides an example of how instructors might direct students in this regard, and the
Teaching Notes point out particular case issues where financial ratios can provide relevant insights.
In addition to the quantitative ratings, students provided qualitative feedback, as reported in
Panel B of Table 2. The comments in Panel B are representative of others given in response to the
anonymous survey. These comments suggest that one of the benefits of using the case is that
students gain a fuller appreciation of work done by accounting professionals in practice. In an
attempt to gauge students’ overall satisfaction with the case, students were asked whether they
recommended that instructors at other universities use the case; 93 percent of survey respondents
gave a favorable recommendation.
2
The three non-author instructors recommended minor revisions, which have been incorporated into the version
presented here.
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Evaluating Financial Results at GAC: The Impact of Accounting Policies
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TABLE 2
Summary of Student Survey Results
Panel A: Student Responses to Case Statements
Mean
SD
t-test
The case . . .
was challenging.
required me to think deeper than the online homework requires.
4.34**
4.66**
0.79
0.65
28.80
38.79
The case helped me learn to . . .
apply knowledge in a realistic setting.
identify where judgment exists in accounting.
see that accounting policy choices affect reported financial results.
calculate financial ratios.
express my thoughts in writing in a professional manner.
4.23**
4.23**
4.55**
3.82**
4.05**
0.66
0.68
0.62
0.90
0.83
28.62
27.44
37.87
13.98
19.29
** Statistically different from neutral midpoint of scale (criterion ¼ 3) at p , 0.001.
For statements listed above, students indicated the extent to which they agreed with each statement using a scale
anchored by 1 (Strongly Disagree), 3 (Neutral), and 5 (Strongly Agree). Means, standard deviations, and one-sample ttests compared to the scale’s neutral midpoint (3) are reported.
Panel B: Survey Comments
þ It changes my perception of what an accountant does and gives me more confidence in my goal to
pursue accounting major.
þ I enjoyed that my knowledge matched the accounting knowledge of Nicki.
þ It was a challenging case that required logical and critical thinking. I had to reference my textbook
many times, which solidified many accounting principles. As an intro accounting class, this gave
good insight into accounting as a whole. I actually enjoyed it!
þ I felt as though I was a professional accountant and applying my knowledge in the right manner was
important.
þ It taught me that answers aren’t always easy to find.
 It was a short read but with many problems embedded. I found this misleading because there are way
more issues than initially perceived.
 I’m used to accounting being concise and quantitative. This was a lot of grey area and judgment.
The excerpts are representative of the positive (þ) and negative () survey comments provided when the case was used as
a writing assignment in the introductory financial accounting course.
TEACHING NOTES AND STUDENT VERSION OF THE CASE
Teaching Notes and the Student Version of the Case are available only to non-student-member
subscribers to Issues in Accounting Education through the American Accounting Association’s
electronic publications system at http://aaapubs.org/. Non-student-member subscribers should use
their usernames and passwords for entry into the system where the Teaching Notes can be reviewed
and printed. The ‘‘Student Version of the Case’’ is available as a supplemental file that is posted
with the Teaching Notes. Please do not make the Teaching Notes available to students or post them
on websites.
Issues in Accounting Education
Volume 30, No. 1, 2015
Phillips
12
If you are a non-student-member of AAA with a subscription to Issues in Accounting
Education and have any trouble accessing this material, then please contact the AAA headquarters
office at info@aaahq.org or (941) 921-7747.
REFERENCES
Claiborne, M. C., and K. A. Wilcox. 2011. Home Heaters: A holistic view of the financial statements. Issues
in Accounting Education 26 (November): 797–806.
Johnstone, N., B. Mackintosh, and F. Phillips. 2013. Second Round Electronics: A case for critical thinking.
Issues in Accounting Education 28 (November): 983–1007.
Persons, O. S. 1998. Best Bike Inc. Journal of Accounting Case Research 4 (Spring): 33–38.
Phillips, F., K. Morris, and K. Zvinakis. 2000. Baywatch International: A case linking financial reporting,
business, and user decisions. Issues in Accounting Education 15 (November): 605–633.
Phillips, F., and B. Mackintosh. 2011. Wiki Art Gallery Inc.: A case for critical thinking. Issues in
Accounting Education 26 (August): 593–608.
APPENDIX A
Additional Guidance for Introductory Financial Accounting Courses
The following additional text can be appended to the case to provide additional support to
students who need help identifying issues to analyze:
Nicki is confident the part-time accountant has properly recorded warehouse repairs, shirt
purchases, and regular operating expenses, but she is unsure about the company’s methods
of accounting for custom shirt sales and possible returns of graphic shirts. She also is
concerned that the accountant may have missed some estimates needed when accounting
for inventory and accounts receivable.
Required
Prepare a memo to Nicki that addresses her uncertainties and concerns. For each area of
concern, (1) describe the applicable accounting standards and the accounting method currently
used, (2) evaluate the current method by considering case facts that support and refute the current
method, (3) propose an alternative method or modification to the current method to improve GAC’s
accounting, and (4) explain the likely effects of the alternative method or modification on GAC’s
financial statements and how these effects could influence GAC’s compliance with terms of its
lending agreement. When considering case facts in (2), evaluate both qualitative and quantitative
information. For example, you should calculate and use the implications of changes in days to
collect receivables and days to sell inventory to critically evaluate GAC’s existing accounting
policies for valuing accounts receivable and inventory.
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4:28-
Week 3 content
Ill 5G 32
Read the Graphic Apparel Corporation (GAC) case study from the above article. Then
write a four to seven page APA paper analyzing the GAC case study by incorporating
the answers to the following questions, in order.
1. What are the key changes affecting GAC this year?
a. Who owns GAC?
b. Who uses GAC’s financial statements?
c. What is significant about GAC’s business relationship with its new user?
2. What are the big events to account for in 2014?
a. How is the custom shirt business working out?
b. What do we know about GAC’s customer base?
c. How is the new graphic design working out?
d. What happened at the warehouse this year?
3. What is the revenue principle? At what point does GAAP indicate revenue should be
recognized?
4. When does GAC report its revenue from custom orders? Under what circumstances
would this be appropriate?
5. What method of accounting for bad debts does GAC use? When is this method
okay?
6. Has anything changed this year to suggest this approach is no longer acceptable?
What do you learn from the number of days to collect receivables in 2014 versus
2013?
7. What method of accounting for bad debts do you think GAC should use?
8. How would changing to this alternative method affect GAC’s financial statements?
How would changing to this alternative method affect GAC’s current ratio?
9. Have circumstances surrounding returns changed in 2014? How?
10. What does GAAP recommend under these new circumstances?
11. Should GAC consider this alternative? Why? Are sales returns material to the key
external user?
12. Which method of accounting for sales returns do you think is best?
13. How would changing to this alternative method affect GAC’s financial statements?
How would changing to this alternative method affect GAC’s current ratio?
14. Using what measurement does GAAP require inventory to be reported?
15. Using what measurement has GAC been reporting its inventory? When is this
appropriate?
16. Has anything changed this year to suggest this approach is no longer acceptable?
What do you learn from the number of days to sell inventory in 2014 versus 2013?
17. What next steps would you recommend for Nicki?
Upload your paper to the Assignments area following your instructor’s instructions.
Case Study Grading Rubric
Planning Ahead4:28
Done
Rubric: Week Three – GAC Case Study
A- to A
90-100%
Ill 5G 32
•
•
•
•
Learner accurately answered 90-100% of the questions in the case.
Learner’s answers were well researched and clearly articulated and
communicated.
Learner’s paper was well organized and clearly indicated the responses to
each of the questions.
All contributions were substantive, relevant, and demonstrated critical
thinking.
The paper has a clear purpose; addresses all aspects of the assignment.
The paper makes its case through logical ideas.
The paper cites sources using style appropriate to the discipline.
Learner accurately answered 80-89% of the questions in the case.
B-to B
80-89%
•
•
•
•
C- to C
•
70-79%
D or F
0-69%
•
Learner’s answers were researched and the responses submitted but not
necessarily based on relevant research.
Learner’s paper was fairly well organized but did not clearly indicate the
responses to each of the questions.
The majority of the contributions were substantive, relevant, and
demonstrated critical thinking.
The paper has clear purpose but may not address all aspects of the
assignment.
The paper makes its case although at times logic may be weak.
The paper cites sources using style appropriate to the discipline.
Learner accurately answered 70-79% of the questions in the case.
Learner’s answers included some research but the research was not
clearly indicated in the responses submitted.
Learner’s paper was not well organized or the responses were not clearly
indicated in the paper.
Some of the contributions were substantive and relevant, though the
majority may not have been substantive or demonstrated critical thinking.
The paper’s purpose is not completely clear and it may not address all
aspects of the assignment.
The paper fails to make its case convincingly and at times logic is weak.
Assignment fails to cite all sources using style appropriate to the discipline.
Learner accurately answered less than 70% of the questions in the case.
• Learner’s answers did not include relevant research.
Learner’s paper was not well organized.
Contributions were irrelevant at times and rarely were substantive or
demonstrated critical thinking.
The presentation fails to address the assignment, is inadequate, is not
acceptable as college-level work, or was not submitted.